* Deputy governor Lane says high debt still a big risk to
* Monetary policy could be deployed if other measures
* Lane warns against risky investments as rates stay low for
OTTAWA, Feb 11 Canadians have taken on debt at a
slower pace recently, but record-high personal debt remains a
risk to the financial system and if the problem persists the
central bank could hike interest rates, a senior Bank of Canada
official said on Monday.
The central bank has described the heated housing market and
indebted consumers as the biggest domestic threat to the
Canadian economy, although there have been signs of cooling.
Last month Moody's Investors Services cut the ratings of six
Canadian banks due to these concerns.
"The growth of household credit has shown signs of
moderating in recent months," Bank of Canada Deputy Governor
Timothy Lane said in the prepared text of a speech he gave at
Harvard University in Cambridge, Massachusetts.
"The momentum in house price growth, sales of existing
homes, and new construction has also moderated. Nonetheless,
financial system risks associated with household imbalances
Lane warned household spending could still regain momentum
or, conversely, there could be a sudden weakening.
The government has intervened four times in the mortgage
market to discourage excessive borrowing and the banking
regulator has also pressed banks to adopt stricter mortgage
"If such targeted prudential measures turned out to be
insufficient, monetary policy could also be used, within a
flexible inflation-targeting framework, as a complementary
instrument to address financial imbalances. So far, though, that
has not been necessary in Canada," Lane said.
The bank has held its benchmark interest rates on hold at
1.0 percent since September 2010, but it has been signaling for
months that it may need to raise rates as the economy expands.
Last month, it softened its stance, saying any withdrawal of
stimulus was "less imminent" in light of weaker-than-expected
growth and inflation, as well as positive signs in the household
Market players surveyed by Reuters predict a first rate hike
in the first quarter of 2014.
Lane also warned that banks, emboldened by an improved
global economic outlook, may take on excessive risk in an
environment of "low-for-long" interest rates.
He said such behavior has been kept in check by a "climate
of fear" after the global financial crisis. But with dangers
such as the U.S. fiscal cliff and the euro debt crisis fading,
banks may adopt more reckless investment strategies in their
search for yield.
"While it is good news that the tail risks have diminished,
it also means that it is now becoming even more important to
monitor financial institutions' risk-taking behavior," he said.